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Despite political and financial crises and turmoil stirring the countries around the world, America remains to be an oasis of government stability, great opportunity of economic growth, unrestricted flow of capital, pro-research and pro-innovation climate, established legal system, natural / shale gas abundance,[1] and low raw material costs. To join America’s boom in nanotech, biotech, hi-tech and other industries, foreign investors open new U.S. companies; move their plants; buy innovative product start-ups; merge with the established company like Italian "Fiat" and American "Chrysler"; partner for product development joint venture or product manufacturing and sales, like German chemicals’ maker BASF joint venture with Total Petrochemicals & Refining USA, Port Arthur, Texas; or acquire and modernize medium size and large corporations.[2]


The pre-acquisition period includes target search, acquisition negotiations, federal government clearances if U.S. national security interests are involved, technology and intellectual property transfer, local government business-specific regulations’ compliance, state/ city tax reduction and/or moratorium, parent-subsidiary corporate structuring, etc. Foreign investments’ inflows increase the U.S. capital needed for new projects implementation and job growth. Such inflows are unrestricted but to make sure that foreign persons do not overtake control (power to direct the business, hire/ fire officers, or buy/sell assets) of the critical-to-security trade or business, the Committee on Foreign Investment in the U.S. (“CFIUS”) reviews “covered transactions” implications. CFIUS (representatives of Treasury, Justice, Defense, Homeland Security departments and other security-focused agencies) has cleared countless transactions and precluded only a few of them.[3] CFIUS member agencies monitor business purchases and may request the filing for the CFIUS review of the pending or completed deal.


Covered transaction’s security risk factors: national security threats to U.S. critical technologies, sources of energy, natural resources and infrastructure (a physical or virtual system / asset the incapacity or destruction of which would be detrimental to national security). In general, broadly interpreted “national security” concept includes acquisitions in any US business sector and depends on the nature of the US target business (goods or services directly or indirectly contribute to US national security) and the foreign acquirer’s identity (especially if it is controlled by a foreign government). For example, China’s Hong Kong based Shuanghui International Holdings Ltd. purchase of Smithfield Foods, Inc., a giant U.S. pork products’ producer, was a “covered transaction” approved by CFIUS, because the acquisition could affect national health and food supply, i.e. indirectly contributing to US national security.


CFIUS review process stages: (1) pre-filing phase (submission of a draft notice and communications with the staff to clarify notice completion / statutory compliance); (2) 30-day review period starting on the next business day after the Staff Chairperson accepts the parties’ joint notice and determines that it complies with regulations’ requirements and usually ending with the transaction clearance; (3) CFIUS-initiated (in some circumstances) subsequent investigation must be completed within additional 45 days; and (4) President must issue a decision within 15 days after CFIUS investigation’s completion and transaction referral for President’s review.


CFIUS notice must provide a detailed explanation/ description of each involved entity, products and services, transaction’s nature, purpose and structure, charts showing control and ownership chains for the foreign acquirer and U.S. business target before and after acquisition, the actual/ foreign party in interest or transaction party’s parent, all classified information contracts/ purchase orders containing a Security Requirements Clause or a Contract Security Classification Specification (not the document, but goods or services to be performed per the contract are classified) and notice certification. CIFUS regulations require the manufacturer/ exporter’s compliance with The International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR) controlling / preventing export and disclosure of sensitive technology to foreign entities. ITAR and EAR reviews / certifications affecting pending transactions should be completed by manufacturer/ exporter before a voluntary notice submission to CFIUS.


CFIUS may approve (with or without certain conditions, such as apprising CFIUS of the transaction status) or reject the parties’ notice withdrawal request. CFIUS may reject a notice if it is incomplete, or notice-provided material information is changed or contradicts with uncovered facts, or because of the parties’ failure to respond within 3 business days to the CFIUS follow-up information request. If CFIUS clears the covered transaction, or imposes risk-mitigating conditions agreed to by the parties, or the President’s decision does not prohibit it, then the parties receive a “safe harbor” for the transaction. In order to obtain a safe harbor provision’s protection from future CFIUS actions, foreign buyers should take into consideration (prior to their voluntary filing with the CFIUS) the precedent established facts and concerns:

  1. CFIUS reviews and discussions with the CFIUS are confidential;

  2. Buyer’s ties to foreign intelligence/ government will be closely analyzed;

  3. Political backdrop / relationship with the buyer’s country (like China or Russia) may trigger higher scrutiny of the transaction;

  4. Pro-active national security risk-mitigation measures include the buyer’s agreement to allow the U.S. stored data be searched by government intelligence services; cede control of business operations and U.S. based technology / assets but keep the revenue stream flowing from the assets; not to make any major changes to the company’s management / workforce; prove that no product market monopoly would result from the merger; divest its defense / military contracts or that key positions be held by Americans;

  5. The U.S. business’ territory being near the military/ defense installations or restricted airspace / waterways or bases is always a national security concern;

  6. The involved technology’s “dual use”/ application for military and commercial purposes is a red flag for CFIUS;

  7. CFIUS jurisdiction limits may be expanded to encompass “covered transactions” in any segment of the US economy;

  8. Transaction size / purchase price makes no difference for the CFIUS review;

  9. CFIUS may invite sua sponte the buyer to file a notice of the transaction after its closing;

  10. Purchase of unique technologies and corresponding patents, and hiring a few employees from the target company may trigger the CFIUS request to file a transaction notice;

  11. CFIUS may recommend to President to order the buyer to divest its control, or acquired assets and hired employees, or unwind the deal;

  12. Buyer accepts the risk of a presidential veto if it goes forward with the purchase without obtaining a pre-acquisition clearance by the federal authorities;

  13. CFIUS and the President have the right not to disclose evidence / reasons for quashing the deal; and

  14. President’s transaction prohibition decision is practically immune to possible legal challenges by the parties.

A properly structured deal satisfying CFIUS national security concerns would facilitate the CFIUS approval. For instance, CFIUS had approved sale (in spite of political opposition) of lithium ion battery manufacturer A123 Systems, Inc. to Wanxiang Group’s (a Chinese auto parts manufacturer) American subsidiary as A123 divested its military contracts and Wanxiang ceded its control/ access to A123’s technology or assets.

Foreign investors would be wise to seek the CFIUS transaction clearance in acquiring US business yielding apparent security concerns (like defense or hi-tech technologies) but also in not so clearly obvious ones (territorial proximity to military bases, dual use technology, national food chain supply, etc.) in view of CFIUS increased post-acquisition reviews and potential CFIUS’ “abortions” of closed deals. Buyers of U.S. businesses having any possible effect on national security should put a CFIUS-clearance contingency provision into their U.S. business purchase agreement giving opportunity to call off the deal in case it is nixed by CFIUS and avoid losing their “face”, time and substantial investment capital.

Foreign capital commercialization and participation in the U.S. economy necessitates certain practical steps:

1. If applicable, pre-clearance voluntary filing of (1) offshore accounts’ voluntary disclosures and negotiations with the IRS as to tax liability ramifications to eliminate the risk of civil penalties and criminal prosecution; or (2) notice with the CFIUS for transactions, which could affect U.S. national security;

2. Formation of holding and operating companies, trusts and other legal entities;

3. Business-specific clearances and permits from federal and state government agencies, and financial institutions for large funds’ transfers, as needed;

4. Due diligence investigation of acquisition target-company and development of innovation-based manufacturing or service companies.

A post-acquisition period involves making money off own capital (money is goods like any other goods), conflict resolutions, compliance with American tax, labor, export, customs, securities, cargo shipping, and a myriad of other laws, rules and regulations, and other issues affecting the enterprise profitability. Foreign investors need strategic guidance and trustworthy counsel in pre- and post-acquisition periods for carrying out their business and financial objectives of investments in the United States.

© Parad Law Offices, P.C., 2014

[1] Resulting in low electricity prices, which, for instance, are about one-third or even half of skyrocketing prices paid by the German industry in view of Germany’s nuclear energy/ power station planned phase-out.

[2] e.g., German software company SAP purchased Ariba, Inc. ("cloud" data centers/ technology for ecommerce); Japanese company Suntory Holdings, Ltd bought U.S. spirits maker Beam, Inc. and gained its widespread bourbon and whiskies distribution chains in the U.S., Brazil, India and Russia; Switzerland's ABB, Ltd. bought American manufacturer of electrical connectors Thomas & Betts Corp.; Brazilian resin producer Braskem scooped Sunoco Chemicals’ polypropylene business; Indian tire maker Apollo Tyres acquired Cooper Tire & Rubber Co., Findlay, Ohio; and Brazilian meatpacker Marfrig bought Keystone Foods, a meat provider to fast food chains Subway and McDonald's.

[3] Sales of 2Wire and Motorola, U.S. network security company 3Com, and 3Leaf Systems, a cloud computing firm, Santa Clara, California, to Huawei Technologies Inc., Chinese telecom equipment maker; Oregon wind farms’ projects from Terna Energy USA Holding Corp. to Chinese owned (Sany Electric) Ralls Corp. were blocked.

#foreigninvestors #coveredtransactionssecurityriskfactors

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